Poor sales season a drag on David Jones

David Jones
has become the first major retailer to downgrade profit forecasts before next month’s reporting season, warning that ­second-half profit could fall as much as 12 per cent and first-half profit next year by 20 per cent after an “unprecedented’’ deterioration in trading.

David Jones chief executive
Paul Zahra
, who only two months ago ­predicted second-half earnings would rise 5 per cent, now expects net profit for the six months ending July to fall 9 to 12 per cent to between $62 million and $64 million.

This will take David Jones’ net profit for the full year to between $167.7 million and $169.7 million, 0.5 to 2 per cent below last year’s result and about 6 per cent below consensus expectations.

The downgrade comes as consumer sentiment plunged to its lowest level in two years.

In a statement issued at 7pm yesterday, after an emergency board ­meeting, Mr Zahra said trading had deteriorated significantly through the all-important clearance sales in June and July.

“The dramatic and rapid deterioration in trading conditions in the fourth quarter has been unprecedented," said Mr Zahra, who took the helm of the upmarket retailer in June last year.

Sales in the 13 weeks ended July were expected to fall by 11 per cent, eclipsing the 10.8 per cent fall in sales in third-quarter 2009, the height of the global financial crisis.

Profits in the first half of 2012 are expected to fall by 15 to 20 per cent, to between $84.5 million and $90 million.

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The profit warning was the first for David Jones since January 2009, but a company spokeswoman said trading conditions were the worst since 2001, when the goods and services tax was ­introduced and the ­dotcom bubble burst.

The downgrade came as consumer sentiment suffered its biggest fall since the collapse of ­Lehman Brothers, reflecting uncertainty over the impact of the carbon tax, Europe’s worsening debt problems and ­elevated interest rates.

The Westpac-Melbourne Institute Consumer Sentiment Index plummeted 8.3 per cent this month to reach 92.8 points, its lowest reading in more than two years, and is approaching lows experienced in late 2008 when confidence was ­battered by the global financial ­crisis.

The survey was conducted last week, before the details of the federal government’s carbon tax package were known.

Earlier this week a National Australia Bank survey found that retailing conditions had fallen to financial crisis levels and economists warned that trading conditions could deteriorate following the release of the ­carbon tax plan, because the biggest spenders on discretionary goods such as fashion will not be fully compensated under the plan.

David Jones, which sells a range of luxury and mid­market brands, will be most exposed to any downturn in spending among wealthier consumers.

Earlier this week women’s wear retailer
Noni B
downgraded full year earnings, while David Jones’ arch rival
Myer
cut its full-year profit forecasts in February after weaker than expected Christmas sales.

Myer expects full-year profits to fall by as much as 5 per cent, compared with earlier forecasts of 5 to 10 per cent growth, reaffirming its new guidance in March and May.

Australia’s largest retailer, Woolworths, downgraded its full-year profit forecasts in January and more downgrades are expected before profit reporting season is over.

Despite the difficult trading environment, Mr Zahra said David Jones would continue to invest in a new online platform, a new point of sale system, the financial services business, brand installations, store refurbishments and the DJs brand.

“We are confident that our business model will allow us to trade through these difficult times and ­leverage the benefits from better trading conditions," he said.

Mr Zahra said David Jones would reset its sales budgets to better manage inventories and variable costs.

David Jones shares fell 7¢ to $3.91 to two-year lows before the profit downgrade.